Central Bankers Hail Forward Guidance

Taking a leaf out of the Fed President, Ben Bernanke’s book, the ECB and subsequently the BoE ushered in forward guidance a few months back to curb volatility and support their respective economies. While acknowledging recent improvements in the economy, the BoE Governor, Mark Carney, warned that any recovery is still in its’ early stages and also affirmed that the required fall in the unemployment rate will be slower than markets expect. In today’s trading session, markets have their eyes set on US retail sales and Reuters/Michigan consumer confidence data for further insights into the probability of the Fed tapering its bond purchases this month. With a rather eventful week coming to an end, the highly anticipated Fed policy meeting next week is expected to grab maximum attention for deciding the near term risk appetite.

Pound Sterling – UK Markets

Sterling saw some volatility yesterday but managed to trade above the 1.58 mark against the US Dollar, partly supported by data released across the Atlantic which showed initial jobless claims falling last week to the lowest level since April 2006, skewed by under-reporting in two states owing to technical snags. Meanwhile, in his testimony to the Treasury Committee, Mark Carney, stated that his forward guidance policy has reinforced the UK economic recovery. While acknowledging recent improvement in the economy, the BoE Governor warned that recovery is still in early stages and also affirmed that a drop in the unemployment rate will be slower than market perception. In today’s trading session, Sterling is hovering around the 1.58 mark against the greenback, as markets brace themselves for the all important Fed policy meeting next week. With little on the domestic economic calendar, some important US macro releases scheduled later today will influence risk sentiment. Meanwhile, in the wake of recent dovish comments from BoE policymakers, the minutes of the last BoE policy meeting next week will be closely watched for deciphering any inconsistency in the voting pattern.

US Dollar – US Markets

The initial jobless claims report released yesterday, though incomplete, highlighted an improving trend and is building a case for the Fed to go ahead with its planned tapering plan, even if at a slower pace, at its policy meeting next week. This has marginally supported the US Dollar against the Euro this morning. The US Dollar had taken some beating against its major counterparts over the past few days following last week’s downbeat non-farm payrolls data and receding fears of an immediate military attack on Syria by the US. Going forward today, the Reuters/Michigan consumer sentiment index and retail sales data will be eyed for further hints into consumers’ outlook on economic situation and their spending pattern. The numbers will provide further assistance to the Fed in assessing the possibility of tapering QE3 next week. Although the Fed policy meeting followed by Ben Bernanke’s press conference will be the major highlight next week, a raft of important domestic economic data will also attract market attention.

Euro – European Markets

The common currency received a boost against the US Dollar in the latter part of yesterday’s trading session amid speculation that the Fed might begin trimming its quantitative easing programme next week following better than expected initial jobless claims data. However, the Euro was under pressure in the early trading session following worse than expected Euro zone industrial production data for July. Traders remain confounded over the recent trend of mixed economic releases from the currency bloc. In its monthly report released yesterday, the ECB reaffirmed its pledge to keep monetary policy accommodative for an extended period, while stating that the central bank’s forward guidance policy has supported the region’s economic recovery. The single currency is trading below yesterday’s highs against the US Dollar this morning on the back of the Fed tapering speculation. Apart from employment data in the Euro zone later today, macro releases in the US will also be eyed for further direction. Moving ahead, a raft of important domestic as well as global economic releases will drive market sentiment next week.

Other Currencies – Highlights

The Japanese Yen traded mostly higher against the US Dollar yesterday but the upside was capped, as upbeat US economic data supported the case for the FOMC tapering QE3 next week. Meanwhile, amid the ongoing chatter surrounding a proposed sales tax hike, Japanese news reports have suggested that Japan’s Prime Minister, Shinzo Abe, is planning to go ahead with planned hike in sales tax rate from April 2014. However, the Japanese Yen has weakened against the majors in today’s trading session despite data released earlier today revealing a rise in the nation’s industrial output for July. Although the Japanese Yen is trading on a weaker footing versus the US Dollar this morning, the pair would witness weakness following skepticism ahead of next week's FOMC policy meeting. With a relatively light domestic economic calendar next week, the Japanese Yen will take direction from news flows emanating from both sides of the Atlantic, especially the US policy decision.